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The Administrative Appeals Tribunal has affirmed the Commissioner’s decision that a settlement of legal proceedings between a financial services entity and a former employee did not involve a taxable supply for GST purposes.

A financial services entity (plaintiff) sued a former employee and his company (Lighthouse), alleging that, in breach of contract, the former employee, either directly or through Lighthouse, had provided and continued to provide financial planning services to 25 named clients of the plaintiff, and had competed and continued to compete for the custom of those and other clients of the plaintiff. The former employee’s contract of employment with the plaintiff had included a restraint of trade clause.

The claims were for damages against the former employee for breach of contract, and for damages against Lighthouse for procuring or inducing breach of contract. There was an alternative claim for an account of profits made by the former employee and/or Lighthouse as a result of the alleged breach of contract.

The proceedings were settled, the defendants agreeing to pay a sum of money to the plaintiff. Lighthouse applied for a private ruling on the question: “Is the payment of $200,000 as settlement of a legal matter [consideration for] a taxable supply for GST whereby [Lighthouse] would be entitled to claim GST.”

The Commissioner’s ruling was that the payment was not for a taxable supply and an objection was disallowed.

The Tribunal found that:

the “substance” of the settlement was not the surrender of contractual rights as Lighthouse contended and this was not the underlying supply for the payment of the settlement sum

the settlement sum was not consideration for a release of the former employee from his restraint clause, and

the payment was not made in consideration of the surrender of the right to sue.